The macroeconomics of happiness

This paper examines how economic forces affect the happiness of nations. First, we show that there are strong microeconomic patterns in the psychological well-being levels of a quarter of a million randomly sampled Europeans and Americans from the 1970's to the 1990's. Happiness equations are increasing in income and have the same structure in each nation. Second, after controlling for the personal characteristics of respondents, year dummies, and country fixed-effects, the paper shows that movements in reported well-being are systematically correlated with movements in macroeconomic variables such as gross domestic product. Booms raise happiness. Our estimates suggest that to compensate the average citizen for one year of recession would take approximately 500 US dollars (in 1985 dollars). Other applications of wellbeing data are given.